ASOS shares slump as talks on credit facility confirmed

ASOS shares slumped on Monday as the online retailer confirmed it was in the final stages of agreeing an amendment to its revolving credit facility after reports that after a leading credit insurer cut cover for its suppliers.

Allianz Trade reduced its insurance cover for ASOS suppliers by more than half, media reported over the weekend, which could force Asos to pay for products up-front, tightening the squeeze on the company's cashflow.

Shares in the company took a hit, and were further battered by a 'sell' recommendation from Canaccord Genuity as part of its initiation of coverage of the e-commerce sector.

“This action will give ASOS significantly increased financial flexibility, against the uncertain economic backdrop. ASOS retains a strong liquidity position and this is a prudent step in the current environment,” the company said.

Reports said the company, scheduled to report full-year results on Wednesday, recently approached the banks behind its £350m revolving credit facility to seek an amendment to its borrowing agreements.

Lenders including Barclays, HSBC and Lloyds Banking Group were lining up AlixPartners and law firm Clifford Chance to advise them on the unfolding situation.

Last month, it said annual profits for the year to August 31 would be "around the bottom end" of a previously indicated £20m-£60m range.

“The fact ASOS is talking to its lenders about more flexible borrowing facilities just goes to show how conditions are very challenging for retailers," said AJ Bell investment director Russ Mould.

“Suppliers take out insurance cover as protection between taking an order and being paid for it. When cover is unavailable, suppliers seek upfront payment from customers, which can put pressure on the latter’s finances as they need to hand over cash before being paid by their own customers."

“Retailers have been struggling with the cost-of-living crisis where consumers are watching every penny, while at the same time they have had to stomach higher costs. Many shopkeepers, virtual or physical, have seen a rise in inventories as demand has weakened. This clogs up valuable storage space and raises the risk they’ll have to slash prices just to shift the stock, thereby depressing profit margins."

“The news is yet another reason for investors to stay negative on ASOS shares, which are now down 78% year-to-date and are trading at a 12-year low.”

Reporting by Frank Prenesti for Sharecast